A Critique of the Nobel Laureates in Economics

I don’t usually write about the Nobel Prizesbecause in general I am against the idea that who is better in the sciences or in the arts can be determined by the vote of a group of experts.

I think we all know enough about the shortcomings of experts after the Covid-19 crisis, and I think it is a conception of science and art as something measurable, evaluable and, furthermore, supposedly incontestable.

But this year the Nobel Laureates in Economics (and I am not saying anything about literature) have once again surpassed themselves in the disappointment.

they have given it to three economists for giving (supposedly) a better explanation of banking crises.

To Bernanke for his explanation of the 1929 crisis and introducing the banking system into explanations of crises (something that seems quite an obvious thing to do), and to Diamond and Dybvig, for his model that gives a simple and stylized explanation of why banking crises occur.

Two meritorious works that do represent advances in economic knowledge.

The problems, and there are two big problems, are with the understanding of what economic science is and its function that these awards convey.

On the one hand, it is ignored that ben bernanke not just an academichas also been very active making economic policyas President of the FED (the Central Bank of the United States) between 2006 and 2014, and as the main economic adviser to the President of the United States in 2005.

None of these facets are named by the Nobel Committee, as if in economic science only theory mattered, and not the application of that theory in reality. Or worse, the usefulness of that theory to explain reality.

because the lord Bernanke was largely responsible for the 2009 crisisand there are many of us who have serious criticism of the decisions he made and the consequences that these had on the economic system.

That, maybe, too should have been valued to award him the Nobel. Not only their contributions to understanding a past crisis, but their participation in a present crisis.

In the case of Diamond and Dybvigdeveloped a model that seems to explain bank runs and offers a solution to them, which is the intervention of governments through reserve systems in the Central Bank.

The problem with your model is precisely that it is a model. That is, to model the complex reality, it is necessary to simplify, making assumptions, general assumptions that are not necessarily always true.

And actually what is being entered into the model it is not the real operation of the banks (which is also different between different banks), but of a supposed model bank, which only acts in three periods (there is no continuous time), does not have secondary money creation, nor prestige risk in its capital, does not have the capacity to create different clauses in their contracts… I mean, it looks as much like a real bank as a real airplane looks like a toy one.

And worse yet, the model that is supposed to explain banking crises ignores how banking crises in history happened.

The functioning of the real banking system is much more complex of what fits in a model and the banking crises have not been produced by the action of the modeled limited agents, but by concomitances that have caused a loss of confidence in the fractional reserve system (an unstable system in itself).

Banking crises areespecially, a trust issueand trust is by its very nature hardly measurable, worse modelling.

Therefore, having a model that supposedly explains banking crises accurately can be counterproductive, since not everything that is outside the model is seen and everything that does not correspond in reality with the assumptions of the model, which is the majority of the economic problems that really cause the crises.

The idea that the Nobel Prize Committee transmits to us with these prizes is that for economic science the political consequences of the theories do not matter, not even the explanatory capacity of the reality of the models.

that economic science is very comfortable in its immaculate ivory tower enough to get dirty with the dirty economic reality.